Obama's plan to purge US banks of toxic assets falters
Friday 29 May 2009
The Obama administration's much-heralded $1 trillion (£626bn) plan to rid US banks of their toxic loans appears to be crumbling, amid disinterest from the very banks it was designed to help.
A key part of the so-called "public-private investment partnership" scheme, or Ppip, has been delayed and according to some reports, may now be put on hold.
The recent "stress tests" of the nation's biggest banks, and their subsequent moves to raise capital from other sources, has reduced the urgency of selling the toxic loans and credit derivatives which caused the holes in their balance sheets.
Under Ppip, private investors and the Government will jointly fund an investment company to buy loans and derivatives from banks. The company would also take on large amounts of debt, provided by government agencies such as the Federal Reserve or the Federal Deposit Insurance Corp, the bank regulator. Adding together public and private funds, plus the debt, the Government said in March $1 trillion could be available through Ppip.
However, the FDIC's chairman, Sheila Bair, has hinted that its part of the Ppip scheme has hit roadblocks. Although the Treasury is still believed to be pressing ahead with plans to buy credit derivatives from banks, the FDIC scheme to buy parcels of loans may not now go forward. A test run of the programme, scheduled for next month, has already been put back, it was reported yesterday.
"We will continue to move ahead, but I think there are some new factors that we need to take into account," Ms Bair said. "Banks have been able to raise a lot of new capital even before taking more aggressive steps to cleanse their balance sheets, so the incentives to sell may be less."
US banks have taken more than $500bn in losses on toxic loans and credit derivatives since the financial crisis erupted in 2007, as falling house prices and soaring foreclosures undermined the value of mortgage derivatives and then led to a wider recession.
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